Summary:
1. GST registration requirement for CHS (Co Operative Housing Society), if their annual turnover is Rs. 20 lakh or more. This limit of Rs.20 lakh will include all Income including interest income & all exempt incomes.
2. GST has provided exemption limit of Rs 7,500 for monthly maintenance charges (per month, per member) paid by residential Member to a housing society
3. This exemption (of Rs. 7,500/- per month) will not be available for commercial units of societies and this exemption is available only to residential units. All CHS having shops or offices would get covered under GST and CHS has to charge 18% GST to them and seek registration with GST.
4. Budget 2021 has made changes in GST wherein all Housing Societies are covered under GST as they render supply of service to members and Society and Members are two separate entities. Only exemption would be Residential units with monthly maintenance charges up to Rs.7, 500/-.
5. GST rate is 18% (State GST 9% & Central GST 9%)
Is GST applicable to CHS?
A. Objects of Housing Society under MCS Act, 1960
A co-operative housing society (CHS), formed under the Maharashtra State Cooperative Societies Act, 1960 and does not carry out activities other than those mentioned in the bye laws of the society. According to Section 2(16) of the Maharashtra Cooperative Society Act, 1960, “housing society ” means a society, the object of which is to provide its members with open plots for housing, dwelling houses or flats; or if open plots, the dwelling houses or flats are already acquired, to provide its memberscommon amenities and services. As a Society, their objects are to obtain conveyance from the Promoter (Builder), in accordance with the provisions of the Ownership Flats Act and the Rules made thereunder, of the right, title and interest, in the land with building/buildings thereon ; to manage, maintain and administer the property of the society; to raise funds for achieving the objects of the society, to undertake and provide for, on its own account or joint with a co-operative institution, social, cultural or recreation activities, and to do all things necessary or expedient for the attainment of the objects of the society, specified in the bye-laws.
B. ‘Supply’ of Services by CHS under GST law
As per Section 9 of CGST Act, 201 7, levy of GST is on supply of goods and services. The word “supply”, is defined in Section 7 of the CGST Act. As per Section 7 (1) of the said Act, “supply” includes all forms of supply of goods or services or both …….. for a consideration by a person in the course or furtherance of business. The term “Supply”, defined under Section 7 is an inclusive definition and not an exhaustive one and therefore it has very wide connotations. Therefore, the activities of CHS in as much as they are………… managing, maintaining and administering the property of the society, raising fund for achieving the objects of the society, undertaking and providing any social, cultural or recreation activities can clearly be considered as rendering of “supply” of service being provided by CHS to its members.
C. Can the CHS be considered as a ‘person’ as mentioned in the definition of supply?
The word “person” mentioned in Section 7 is defined in Section 2(84) (i) of the CGST Act, 2017 and amongst others, specifically includes ‘a co-operative society registered under any law relating to co-operative societies’. Thus a registered co-operative society is a person within the meaning of the term in the CGST Act. Thus there is a supply made by a person i.e. CHS.
D. Can the activities (supply of services) by the society i.e. ‘a person’, can be said to be made for a consideration?
As per Section 2(31) of the CGST Act, 2017, consideration, in relation to the supply of goods or services or both, includes any payment made or to be made, whether in money or otherwise, in respect of, in response to, or for the inducement of, the supply of goods or services or both, whether by the recipient or by any other person. From the definition of the term “consideration”, it can be construed that membership fees collected by the CHS from its members is also meant for meeting expenses for activities undertaken by the CHS to achieve the various objects of the society as mentioned in By-laws of the Society. Thus, membership fee collected by CHS from its members will be treated as “consideration” paid for supply of services.
E. Can the activity of the society i.e. ‘a person’, be said to be in the course or furtherance of business?
The definition of business as per Section 2(17) of the CGST Act, 2017 includes, provision by a club, association, society, or any such body (for a subscription or any other consideration) of the facilities or benefits to its members. In the subject case, CHS is making supply to its members and receiving consideration for the same. Further, as per the definition of “business”, various activities undertaken by the CHS is for the benefit of its members and will come under the scope of business. In view of the above all the conditions as stipulated for considering the activities of applicant as “Supply” under the GST Law were fulfilled.
F. Whether Principle of Mutuality exempts CHS from GST?
Many Consultants & Lawyers argue that Co Operative Housing Society and its members cannot be treated as distinct persons, by citing the “principle of mutuality”.
However AAAR had decided that both, the CHS as well as its members are to be considered as separate person. Even Budget 2021 has also confirmed this by amending CGST Act retrospectively from 1-7-2017 to provide that “an association and its members will be deemed to be two separate entities”.
The contention made by the CHS with regard to the principle of mutuality to establish their claim that the CHS and its member are not distinct entity is not tenable in so far as taxability in the GST regime is concerned.
Circular No. 109/28/2019- GST dated 22.07.2019 issued by the Government of India clarifies that Supply of service by Resident Welfare Association (unincorporated body or a non- profit entity registered under any law) to its own members by way of reimbursement of charges or share of contribution up to an amount of Rs. 7,500 per month per member for providing services and goods for the common use of its members in a housing society or a residential complex are exempt from GST.
A reading of the said circular makes it clearly evident that it is the intention of the Government to tax Housing Societies under GST Laws subject to the condition that the reimbursement of charges or share of contribution of the members exceed an amount of Rs. 7,500 per month per member for Supply of service rendered by CHS (Resident Welfare Association (unincorporated body or a non- profit entity registered under any law)) to its own members.
However there is recent 'landmark' judgment by the Honourable Supreme Court in the case of 'Calcutta Club Limited' which upheld the principle of mutuality in the context of Sales Tax and Service Tax. Hence many CHS are taking the view that CHS is outside GST.
Doctrine of Mutuality
The doctrine of mutuality is premised on the theory that a person cannot make a profit from himself. An amount received from oneself, therefore, cannot be regarded as income and taxable. Mutuality involve that the contributors to the common fund are entitled to participate in the surplus thereby creating an identity between the participators and the contributors. Once such identity is established the surplus income would not be eligible to the tax on the principle that no man can make a profit out of himself.
There are 3 important tests / conditions to prove the existence of mutuality.
(i) Oneness of the contributors to the fund and the recipients from the fund,
(ii) Entity constituted only for the convenience and common benefit of the members.
(iii) Impossibility that contributors derive profit from the contributions made by them to a fund which could only be expended or returned to themselves.
The said doctrine of mutuality is applicable in the case of the resident housing welfare society which is an incorporated bodies formed of the members, for the members, by the members. The contributors are the members themselves wherein the members contribute in the form of society maintenance as reimbursement of common expenses. Thus, there is no “facility” or benefit” provided to members by the society.
Hence many welknown Consultants & Lawyers argue that by the same principle of mutuality CHS should not be liable to charge GST on the maintenance received from members of the society.
G. Budget 2021 changes
The basic foundation of GST is that it is a tax on the ‘supply’ of goods or services and the scope of this term has been widened in the Budget 2021 provisions. The explanatory memorandum states that the objective of the amendment is “to ensure levy of tax on activities or transactions involving ‘supply’ of goods or services by an association to its members for cash, deferred payment or other valuable consideration.” Further, the amendment proposed is retrospective and dates back to July 1, 2017, when GST was introduced.
The tenet that an association and its members are one and the same governs the ‘principle of mutuality’. GST laws did not contain any specific provision which set down that an association and its members were distinct entities.
Banking on this principle, which had been upheld by various courts, including the Supreme Court, several large CHS took the view that they did not ‘supply’ services to members, as the members are not distinct entities. Thus, they did not levy and collect GST against the fees from their members. In addition to widening the scope of the term ‘supply’, Budget 2021 provisions also provide that an association and its members will be deemed to be two separate entities.
H. Author’s Take
Yes, Housing Society (CHS) are covered under the principles of “Mutuality” and Income Tax Department has accepted this principle even though there is no specific mention in the Income Tax Law. Now that AAAR has opined that GST is applicable to CHS and Budget 2021 has amended CGST where in levy of tax on activities or transactions involving ‘supply’ of goods or services by an association to its members for cash has been retrospectively amended WEF 1-7-2017 (date on which GST was introduced). , Budget 2021 provisions also provide that an association and its members will be deemed to be two separate entities and thus argument of “Mutuality” becomes meaningless and SC judgments in the case of Calcutta Club would not be applicable.
However, CHS (Housing Society) is specifically covered for taxation of GST beyond exemption of Rs.7, 500/- per month per member (residential units only) in respect of their monthly maintenance contribution. With this this, most of the Housing Society will get covered excepting those CHS having Commercial units like Shops or offices.
Many CHS also receive other incomes such as Hoarding rent, Mobile Tower Rent, amount recovered for use of Society’s facilities for advertisement, Mobile Tower or private functions etc. Few CHS charge Transfer fees in excess of stipulated Rs.25, 000/- in the form of Transfer Premium, Fees, Charges or Donation and seek exemption from Income Tax & even GST (Earlier in Service Tax law) on the principle of “Mutuality” as givers are “Member”, whether outgoing or incoming. Many CHS recover Transfer premium as a % to sale consideration.
Question is what the supply of service is and whether Mutuality exempts them?
Many CHS argue that they have to process the transfer application and have to incure costs such as Legal fees, calling Management Committee meeting to consider & approve the transfer and incure associated administrative expenses and thus it is supply of service and hence not liable for GST. However, GST has already provided exemption of Rs.7,500/- for monthly maintenance and once it croses that limit, GST is applicable on entire amount. GST is also applicable on Transfer Premium as it is not a monthly and a one time fee charged by the Society on the occasion of transfer of flat and thus cannot be considered as exempt.
In my opinion, this question could be answered by Supreme Court and it takes 10/15 years to get verdict from SC and if CHS has not collected GST, then they may have to pay GST with Interest out of Society’s corpus having not collected GST from member. If CHS approaches members for collection after 15 years, it may happen that many members have already sold their flat and new member may not be willing to contribute. This may open up further litigation. Hence to be on a safer side, CHS should collect GST @ 18% on Transfer Premium, by whatever name it is called such as Donation or Premium or Charges.
If CHS decides to collect GST, then they have to deposit the amount collected in the time period specified. Only option is to pay the GST “under protest” and then litigate from Commissioner to Tribunal to High Court and finally Supreme Court. Litigation has its cost (as lawyer’s cost is prohibitive). Whether members of CHS would be willing to contribute for the litigation cost?
Hence, my advice is that CHS should seek GST registration if their turnover exceeds Rs.20 lakh and they have taxable services (like recoveries from Shops, offices, Hoarding/Advertisement Rent, Mobile Tower Rent, Rent for use of facilities of Society) under GST and any amount received which is not in the nature of monthly maintenance charges by the Society becomes liable to be taxed @ 18% and pay GST. Society will get input tax credit proportionally (excluding attributable to exempt portion of Rs.7, 500/- to residential units).